Internal audit report : agricultural lease auction review.

L 700.3 161ag 2003 c.1
RECEIVED
DEe 2 9 2003
COMMISSIONERS OF THE LAND OFFICE
OFFICE OF THE
~RS
ADMINISTRATION
Brad Henry, Governor
Mary Fallin, Lt. Governor
Jeff A. McMahan, State Auditor
Sandy Garrett, State Superintendent
Terry Peach, Agriculture Board President
Ernest Hellwege, Secretary
Stephen G. Colt, General Counsel
December 22, 2003
The Honorable Brad Henry
Governor of Oklahoma
212 State Capitol Building
Oklahoma City, OK 73105
RE: Internal Audit Report
Agricultural Lease Auction Review
Dear Governor Henry:
A review covering the ten annual agricultural lease auctions conducted from October 20, 2003
through November 5, 2003 was completed. The audit covered the effectiveness of the agency's
procedures and internal controls used at the lease auctions and in the processing and accounting
for the leasing in the general office. The audit also evaluated the agency's compliance with the
Enabling Act, Oklahoma Statutes and management prescribed procedures used in leasing land.
The audit revealed the CLO was in compliance with all laws and directives. It was a very "clean
audit." The auctions and the processing and recording of the leased land were handled properly
and efficiently. And, as the audit report states, the employees conducted themselves in a
courteous, respectful and a friendly business manner. The audit report is enclosed.
Should you have questions or comments about the audit, please call me at 604-8118.
Sincerely,
~~
Roy Cooper, CPA
Chief Internal Auditor
Enclosure: Agricultural Lease Auction Review
c: Clifton H. Scott
Suite 200 Paragon Building, 5801 Broadway Extension, P.O. Box 26910, Oklahoma City, OK 73126
405-604-8100 Fax 405-604-8199
http://www.c1o.state.ok.us
INTERNAL AUDIT REPORT
AGRICULTURAL LEASE AUCTION REVIEW
PURPOSE AND SCOPE
This review covered the Real Estate Management Division's performance and
effectiveness of procedures and internal controls used during the 2003 annual lease
auctions for recording bids, preparing contracts, receipt and deposit of monies and
recording of the transactions in the general office. The audit also evaluated whether the
Commissioners of the Land Office (CLO) is in compliance with Oklahoma statutes (Title
64, as amended) and management's prescribed policies and procedures concerning the
leasing of land.
The review included the accounting for the ten annual agricultural lease auctions
conducted from October 20,2003 through November 5,2003.
A field review was conducted at five agricultural lease auction locations; Bums Flat,
Stillwater, Shawnee, Lawton and EI Reno. The procedures used to conduct these five
auctions and to process and record the transactions were observed and examined. Most
leases were for the standard five-year period. Each tract was appraised for a minimum
amount of yearly rent that would be acceptable.
AGRICULTURAL LEASE AUCTION SUMMARY
The total income from the auctions was $1,865,250. The leases in this year's auctions
were appraised at $1,521,400. The tracts that were leased were appraised at $1,513,200.
The tracts were leased at a "bonus" of $352,050 (23%) above the appraised value. On
243 tracts there were competitive bidding of two or more individuals bidding against
each other to obtain the lease. This resulted in a 63% increase in income over the
appraised value in these competitive bid leases.
Approximately 1/5th of the 2,634 agricultural tracts are auctioned and leased each year
due to the 5-year term of agricultural leases required by the Oklahoma Constitution. This
year thirty-six Counties containing 576 agricultural tracts (142,184 acres) were offered
for lease at the auctions. Two tracts were not leased. The Secretary rejected bids on two
other tracts. If these tracts are not leased before January, on first come bases, the
appraisal will be reviewed and the leases will be put up again for auction in January.
Of the 576 leases, 53 were special conservation leases, Special conservation leases
require the lessee to perform to improve the leasehold. Examples: building and
maintaining terraces, removal of cedar trees, grazing restrictions and other needed
conservation practices.
Three of the leases were for two years duration, two leases were for three years and nine
leases were for four years. This change from the normal five year leases was to get these
leases back into their normal five year lease cycle. This was the result of tracts being
taken back into inventory due to non-payment before the end of the standard five year
lease period, or withheld the previous year because of the poor condition of the leasehold
caused by drought.
This was the twentieth year anniversary for the CLO public auctions of agricultural
leases.
SUMMARY OF AUDIT FINDINGS
1. Procedures and Duties
The Oklahoma Statutes covering the leasing of surface land and management's prescribed
procedures were adhered to during the auctions that were observed. The auctions were
well organized. It was observed that the CLO employees were knowledgeable and very
efficient in their duties. It was also observed that they treated the bidders with courtesy,
respect and in a friendly business manner.
2. Reconciliation Of Land Records.
One of the objectives of reviewing the internal controls was to determine if all of the
CLO acreage was leased or offered for lease. The auditor found all acreage in the Real
Estate Management (REM) Division's records had been accounted for and was either
leased or those not leased had been offered for lease. However, the real estate records
may possibility not be accurate, as they have been only partly reconciled to historical
records. The REM Division has had a project underway to reconcile their land records.
They had completed approximately 3/4ths of the project in January 1994, and stopped
due to work priorities.
Comment:
Mr. Keith Kuhlman, Real Estate Management Director, said they would finish the
reconciliation when Mr. Jim Holshouser, CLO's Computer Service Administrator, creates
a land records history program and the database is build. This will require all
transactions in the past to be recorded and will result in reconciling to the present records.
2
3. Improper Handling of Bidder Report.
When a bidder registers he is assigned a bidders number to use in the auction to identify
him. Several "bidder's reports" are prepared showing the bidder's number, name,
address, telephone and social security number. During the auction the winning bidder's
number and amount of winning annual rent is recorded at the auction table on a "bidder's
receipt." It is then taken to the payment desk where the CLO employees record the name,
address and social security number on the receipt using the bidder report. When the
auction is over the "bidder's reports" are put in a box to be returned to the office to be
shredded. At the Stillwater auction one report was accidental tossed in a garbage can.
The auditor retrieved the report and it was handled properly.
Correction:
A lease auction computer application program is used at the lease auctions. Mr. Jim
Holshouser, using Microsoft's Access database management program created the lease
auction program in 1999 and has steadily been improving it. Next year the bidders
receipt will be electronically prepared at the auction desk and printed at the payment
desk. The "bidder's report" will not be prepared.
4. The Computer Program For Real Estate Land Management Has Not Been
Documented.
The Access computer program for real estate land management has not been documented.
The auditor had to obtain all operational information on how the program was set-up and
operated from Mr. Jim Holshouser. He has developed and managed the real estate land
management Access program. He is still in the process of refining the program and
debugging it so he can turn it over to REM. This was also reported in the February 21,
2003, Review of Real Estate Accounts Receivable and Land Management Data Program
audit report.
Corrective Action and Comments:
Mr. Holshouser said he has started the process of documenting the program. He stated he
needs to make minor modifications and adjustments to the program and complete the
interface of the program with the Geographic Information System
5. One Half Of The Required Rental Was Not Collected For Two Leases At
Auction.
Under the Surface Leasing Rules and Regulations and in the terms and conditions of the
auction the successful bidder must pay 50 percent of the first year's rent as a deposit.
Mathematical errors were manually made by CLO employees in calculating one half of
the rental due on two of the 576 leases at the auction. The first lease was in Texas
County, Lease No. 102135, leased by Kenny Lunsford for $25,500 annual rental. Deposit
was miscalculated at $11,250, should have been $12,750. The second lease was in
Stephens County, Lease No. 101208, leased by David Johnson, for $6,500 annual rent.
Deposit was miscalculated at $3,200.50, should have been $3,250.
3
The Lessees were billed for the remaining balance for the first year's annual lease in
November, due December 31,2003.
Corrective Action:
Mr. Jim Holshouser said next year instead of the CLO employee's manually calculating
the 50% deposit of annual rent, it will be calculated by the computer when the bidders
receipt is prepared at the auction desk. The receipt will be printed at the payment desk.
-J.,1?P.~,n_;¥~af::7'~=.,tp..rL'- December 22, 2003
Roy E. Cooper, CPA
Chief Internal Auditor
DISTRIBUTION:
Brad Henry, Governor
Mary Fallin, Lt. Governor
Jeff McMahan, State Auditor
Sandy Garrett, State Superintendent of Public Instruction
Terry Peach, President of State Board of Agriculture
Clifton H. Scott, Secretary
John C.Rahhal, Business Manager / Assistant Secretary
J. Keith Kuhlman, Real Estate Management Director
Jim Holshouser, Computer Service Administrator
Tom McCreary, Accounting Division Director
4

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L 700.3 161ag 2003 c.1
RECEIVED
DEe 2 9 2003
COMMISSIONERS OF THE LAND OFFICE
OFFICE OF THE
~RS
ADMINISTRATION
Brad Henry, Governor
Mary Fallin, Lt. Governor
Jeff A. McMahan, State Auditor
Sandy Garrett, State Superintendent
Terry Peach, Agriculture Board President
Ernest Hellwege, Secretary
Stephen G. Colt, General Counsel
December 22, 2003
The Honorable Brad Henry
Governor of Oklahoma
212 State Capitol Building
Oklahoma City, OK 73105
RE: Internal Audit Report
Agricultural Lease Auction Review
Dear Governor Henry:
A review covering the ten annual agricultural lease auctions conducted from October 20, 2003
through November 5, 2003 was completed. The audit covered the effectiveness of the agency's
procedures and internal controls used at the lease auctions and in the processing and accounting
for the leasing in the general office. The audit also evaluated the agency's compliance with the
Enabling Act, Oklahoma Statutes and management prescribed procedures used in leasing land.
The audit revealed the CLO was in compliance with all laws and directives. It was a very "clean
audit." The auctions and the processing and recording of the leased land were handled properly
and efficiently. And, as the audit report states, the employees conducted themselves in a
courteous, respectful and a friendly business manner. The audit report is enclosed.
Should you have questions or comments about the audit, please call me at 604-8118.
Sincerely,
~~
Roy Cooper, CPA
Chief Internal Auditor
Enclosure: Agricultural Lease Auction Review
c: Clifton H. Scott
Suite 200 Paragon Building, 5801 Broadway Extension, P.O. Box 26910, Oklahoma City, OK 73126
405-604-8100 Fax 405-604-8199
http://www.c1o.state.ok.us
INTERNAL AUDIT REPORT
AGRICULTURAL LEASE AUCTION REVIEW
PURPOSE AND SCOPE
This review covered the Real Estate Management Division's performance and
effectiveness of procedures and internal controls used during the 2003 annual lease
auctions for recording bids, preparing contracts, receipt and deposit of monies and
recording of the transactions in the general office. The audit also evaluated whether the
Commissioners of the Land Office (CLO) is in compliance with Oklahoma statutes (Title
64, as amended) and management's prescribed policies and procedures concerning the
leasing of land.
The review included the accounting for the ten annual agricultural lease auctions
conducted from October 20,2003 through November 5,2003.
A field review was conducted at five agricultural lease auction locations; Bums Flat,
Stillwater, Shawnee, Lawton and EI Reno. The procedures used to conduct these five
auctions and to process and record the transactions were observed and examined. Most
leases were for the standard five-year period. Each tract was appraised for a minimum
amount of yearly rent that would be acceptable.
AGRICULTURAL LEASE AUCTION SUMMARY
The total income from the auctions was $1,865,250. The leases in this year's auctions
were appraised at $1,521,400. The tracts that were leased were appraised at $1,513,200.
The tracts were leased at a "bonus" of $352,050 (23%) above the appraised value. On
243 tracts there were competitive bidding of two or more individuals bidding against
each other to obtain the lease. This resulted in a 63% increase in income over the
appraised value in these competitive bid leases.
Approximately 1/5th of the 2,634 agricultural tracts are auctioned and leased each year
due to the 5-year term of agricultural leases required by the Oklahoma Constitution. This
year thirty-six Counties containing 576 agricultural tracts (142,184 acres) were offered
for lease at the auctions. Two tracts were not leased. The Secretary rejected bids on two
other tracts. If these tracts are not leased before January, on first come bases, the
appraisal will be reviewed and the leases will be put up again for auction in January.
Of the 576 leases, 53 were special conservation leases, Special conservation leases
require the lessee to perform to improve the leasehold. Examples: building and
maintaining terraces, removal of cedar trees, grazing restrictions and other needed
conservation practices.
Three of the leases were for two years duration, two leases were for three years and nine
leases were for four years. This change from the normal five year leases was to get these
leases back into their normal five year lease cycle. This was the result of tracts being
taken back into inventory due to non-payment before the end of the standard five year
lease period, or withheld the previous year because of the poor condition of the leasehold
caused by drought.
This was the twentieth year anniversary for the CLO public auctions of agricultural
leases.
SUMMARY OF AUDIT FINDINGS
1. Procedures and Duties
The Oklahoma Statutes covering the leasing of surface land and management's prescribed
procedures were adhered to during the auctions that were observed. The auctions were
well organized. It was observed that the CLO employees were knowledgeable and very
efficient in their duties. It was also observed that they treated the bidders with courtesy,
respect and in a friendly business manner.
2. Reconciliation Of Land Records.
One of the objectives of reviewing the internal controls was to determine if all of the
CLO acreage was leased or offered for lease. The auditor found all acreage in the Real
Estate Management (REM) Division's records had been accounted for and was either
leased or those not leased had been offered for lease. However, the real estate records
may possibility not be accurate, as they have been only partly reconciled to historical
records. The REM Division has had a project underway to reconcile their land records.
They had completed approximately 3/4ths of the project in January 1994, and stopped
due to work priorities.
Comment:
Mr. Keith Kuhlman, Real Estate Management Director, said they would finish the
reconciliation when Mr. Jim Holshouser, CLO's Computer Service Administrator, creates
a land records history program and the database is build. This will require all
transactions in the past to be recorded and will result in reconciling to the present records.
2
3. Improper Handling of Bidder Report.
When a bidder registers he is assigned a bidders number to use in the auction to identify
him. Several "bidder's reports" are prepared showing the bidder's number, name,
address, telephone and social security number. During the auction the winning bidder's
number and amount of winning annual rent is recorded at the auction table on a "bidder's
receipt." It is then taken to the payment desk where the CLO employees record the name,
address and social security number on the receipt using the bidder report. When the
auction is over the "bidder's reports" are put in a box to be returned to the office to be
shredded. At the Stillwater auction one report was accidental tossed in a garbage can.
The auditor retrieved the report and it was handled properly.
Correction:
A lease auction computer application program is used at the lease auctions. Mr. Jim
Holshouser, using Microsoft's Access database management program created the lease
auction program in 1999 and has steadily been improving it. Next year the bidders
receipt will be electronically prepared at the auction desk and printed at the payment
desk. The "bidder's report" will not be prepared.
4. The Computer Program For Real Estate Land Management Has Not Been
Documented.
The Access computer program for real estate land management has not been documented.
The auditor had to obtain all operational information on how the program was set-up and
operated from Mr. Jim Holshouser. He has developed and managed the real estate land
management Access program. He is still in the process of refining the program and
debugging it so he can turn it over to REM. This was also reported in the February 21,
2003, Review of Real Estate Accounts Receivable and Land Management Data Program
audit report.
Corrective Action and Comments:
Mr. Holshouser said he has started the process of documenting the program. He stated he
needs to make minor modifications and adjustments to the program and complete the
interface of the program with the Geographic Information System
5. One Half Of The Required Rental Was Not Collected For Two Leases At
Auction.
Under the Surface Leasing Rules and Regulations and in the terms and conditions of the
auction the successful bidder must pay 50 percent of the first year's rent as a deposit.
Mathematical errors were manually made by CLO employees in calculating one half of
the rental due on two of the 576 leases at the auction. The first lease was in Texas
County, Lease No. 102135, leased by Kenny Lunsford for $25,500 annual rental. Deposit
was miscalculated at $11,250, should have been $12,750. The second lease was in
Stephens County, Lease No. 101208, leased by David Johnson, for $6,500 annual rent.
Deposit was miscalculated at $3,200.50, should have been $3,250.
3
The Lessees were billed for the remaining balance for the first year's annual lease in
November, due December 31,2003.
Corrective Action:
Mr. Jim Holshouser said next year instead of the CLO employee's manually calculating
the 50% deposit of annual rent, it will be calculated by the computer when the bidders
receipt is prepared at the auction desk. The receipt will be printed at the payment desk.
-J.,1?P.~,n_;¥~af::7'~=.,tp..rL'- December 22, 2003
Roy E. Cooper, CPA
Chief Internal Auditor
DISTRIBUTION:
Brad Henry, Governor
Mary Fallin, Lt. Governor
Jeff McMahan, State Auditor
Sandy Garrett, State Superintendent of Public Instruction
Terry Peach, President of State Board of Agriculture
Clifton H. Scott, Secretary
John C.Rahhal, Business Manager / Assistant Secretary
J. Keith Kuhlman, Real Estate Management Director
Jim Holshouser, Computer Service Administrator
Tom McCreary, Accounting Division Director
4